'Junk' default rate increases: Moody's

Says rate could hit bottom in March or April before rising

By

RachelKoning

CHICAGO (CBS.MW) -- Led by four defaults at U.S.-based entities, the rate of global speculative-grade bond defaults edged up in October -- the first month-to-month increase in a year, Moody's Investors Service said Monday.

The default rate on these so-called "junk" bonds stood at 2.4 percent last month, up from 2.3 percent in September, the credit ratings firm said.

Despite October's results, credit conditions at most lower-rated companies are likely to continue to improve in the near term should global business growth conditions remain more favorable than over the past few years, said David Hamilton, Moody's director of corporate default research.

By the same token, "the default rate may be approaching a cyclical low," Hamilton noted.

"What's different now versus six months or a year ago is we're past the balance-sheet-repair phase and into a credit-expansion phase," he said.

Hamilton expects the default rate to bottom out near 1.9 percent around March or April of next year before beginning to trend higher.

With increased debt in circulation, there's a greater chance for an increase in defaults.

The four corporate bond defaults reported for October were valued at roughly $3.1 billion on a combined basis.

The largest default in October and so far this year, was Trump Atlantic City Associates' $1.3 billion in missed bond payments. The group is affiliated with Donald Trump's Trump Hotels & Casino Resorts Inc.
DJTC
but issues debt separately.

Trump Hotels & Casino Resorts has reached an agreement with bondholders as part of its expected Chapter 11 filing next month. See related story.

The next largest October default, valued at $1.25 billion, was RCN Corp.
RCNCQ
a cable-television, telephone and Internet service provider that filed for bankruptcy protection earlier this year.

In addition, discount airline parent ATA Holdings
ATAHQ
defaulted on $398 million in bonds, while home-furnishings and gifts manufacturer Syratec Corp.
SYRA
defaulted on $118 million in bonds.

For just U.S.-denominated issuance, the default rate rose to 2.9 percent in October from 2.8 percent in September. The rate is down from 5.4 percent in January 2004 and 5.8 percent in October 2003.

The rate of default among European corporate debt issuers was unchanged in October, matching September's 0.7 percent. Last month's rate was down from 6 percent in January and 9.3 percent a year ago.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.